11 December 2015

Countervailing duty laws in India

by Radhika Sharma

India has finally opened its account by concluding its first Countervailing Duty (“CVD”) investigation with the issuance of the final findings [see end note 1] in the CVD investigation concerning “Castings for Wind Operated Electricity Generators” from China PR. However, this has brought to light the fact that certain provisions of the Indian law relating to imposition of Countervailing Duty, are not in conformity with the Agreement on Subsidy and Countervailing Measures (“ASCM”)


What are Subsidies and why is Countervailing Duty investigations carried out?

Subsidy is defined as the benefits that come from outside a business or firm [see end note 2]. Subsidies are usually granted by the Government in order to promote economic, social and political policy [see end note 3]. Such subsidies have varying impact on the domestic industry of the importing country. So, in order to keep the domestic producers at par with the foreign producers, who have benefitted from a subsidy provided by their respective government, countervailing duty (CVD) investigations are carried out for imposing a duty to countervail the subsidies bestowed upon the imported products.  In any such CVD investigation, the primary task is to examine whether the alleged subsidies are counteravailable in terms of the provisions of the ASCM.


Non-actionable subsidies under ASCM

Article VI of GATT 1947 regulates the imposition of Anti-dumping Duties and Countervailing Duties. Part-V of the ASCM provides the provisions governing the investigation of countervailable subsidies and the levy of countervailing duty. At the time of coming into force of the ASCM, it recognised three types of subsidies, viz., Prohibited (Part –II), Actionable (Part –III) and Non-actionable (Part- IV).

Prohibited subsidies include export subsidies and subsidies for import substitution (i.e. use of domestic over imported goods).  Actionable subsidies included subsidies that would cause or threaten material injury to the domestic industry of other member, or nullify or impair benefits accruing directly or indirectly to other members, or cause serious prejudice to other members [see end note 4]. Non-actionable subsidies are not countervailable. In terms of Article 8 of the ASCM, non-actionable subsidies included subsidies that were not specific under Article 2 of the ASCM and also subsidies for research and development, subsidies for assistance to dis-advantageous region and subsidies for new environmental requirements [see end note 5].

When the ASCM agreement was signed, Article 8 of the said Agreement, dealing with non-actionable subsidies, was applied provisionally for five year period in terms of Article 31 of the ASCM. Article 31 provided that not later than 180 days before the end of the said five year period, the Committee shall review the operation of those provisions, with a view to determining whether to extend their application, either as presently drafted or in a modified form, for a further period. However, the provisions of Article 8 were not extended as no consensus was reached between the members [see end note 6] for extension or modification of the said provision.  Thus, the category of non-actionable subsidies ceased to exist as of 31 December 1999, as per ASCM Article 31[see end note 7].


Non-actionable subsidies under Indian law

Indian law relating to imposition of CVD is contained in Section 9 of the Customs Tariff Act 1975 (the “Act”) and the Customs Tariff (Identification, Assessment, and Collection of Countervailing Duty on Subsidized Articles and for Determination of Injury) Rules, 1995 (the “CVD Rules”). Section 9, sub-clause (3) of the Act, provides that the Central Government shall not levy countervailing duty unless it is determined that the subsidies are – (a) export oriented, or (b) contingent upon use of domestic goods over imported ones or (c) conferred on limited number of persons engaged in manufacturing, producing and exporting the article. Further, clause (c) of sub-section (3)  of Section 9 dealing with the determination of specificity of subsidies in question, provides that duty shall not be imposed if, the subsidy is falling under Section 9(3)(c) if it is for (a) research activities conducted by or on behalf of persons engaged in the manufacture, production or exporting; or (b) assistance to disadvantaged regions within the territory of the exporting country; or (c) assistance to promote adaptation of existing facilities to environmental requirements. Thus, the concept of non-actionable subsidies is fully incorporated in the Indian laws.
Apart from the express prohibition contained in Section 9(3)(c) of the Act, an indirect  reference may also be found in the CVD Rules. Rule 4(i) enjoins a duty on the designated authority to determine the nature and amount of subsidy. Rule 11 provides that the Authority, need not ascertain as to the nature of subsidies if they are related to (a) Research activities conducted by or on behalf of persons engaged in the manufacture, production or exporting; or (b) Assistance to disadvantaged regions within the territory of the exporting country; or (c) assistance to promote adaptation of existing facilities to environmental requirements. Without examining whether the subsidies are specific within the meaning of Article 2 of ASCM, no CVD can be levied in respect thereof.  Accordingly, by excluding the three types of subsidies from the scope of the specificity analysis, the Indian laws effectively provide a window for excluding non-actionable subsidies from the levy of CVD.

Section 9(3)(c) of the Customs Tariff Act, 1975 and the relevant CVD Rules mentioned above were enacted with effect from 1-1-1995, by Section 2, of the Customs Tariff (Amendment) Act, 1994 (12 of 1994), the said provision have not however been amended in keeping with the existing provisions on non-actionable subsidies under the ASCM. Despite the fact that the WTO law no longer recognises non-actionable subsidies, the Indian law continues to recognise them under Section 9(3) of the Custom Tariff Act 1975. This provision is more beneficial to other Members of the WTO and therefore, none of them have raised any objections.


Status of non-actionable subsidies in USA and EU

The USA has already amended its provisions in compliance with the SCM Agreement [see end note 8]. The said law for U.S. expired on July 1, 2000,   under Section 282(2)(c) of URAA, provides that sub-paragraph B, C, D and E of Section 771 of the Tariff Act 1930 [see end note 9], which established the non-countervailable status of “non-actionable subsidy” under U.S. law expires 66 months after the date of entry into force of the WTO unless extended by Congress.

Similarly, the EU has also amended its provisions for non-actionable subsidy vide document No. Com (2002) 468 final, dated 19.08.2002, amending EU Council Regulation (EC) No 2026/97 of 6 October 1997 [see end note 10]. In its preamble, EC stated the rationale for making the amendment in the following words:

Article 4 of Regulation (EC) No 2026/97 provides that certain subsidies for environment, research and regional development are non-countervailable. Furthermore, Article 10 (5) and (6) of that Regulation state that investigations can be initiated to determine whether subsidies have such non-countervailable status or must not be initiated if they relate to certain non-countervailable subsidies. The corresponding provisions in the WTO Agreement on Subsidies and Countervailing Measures were due to expire on 31 December 1999 unless the Members of the WTO decided otherwise. No such decision has been taken and therefore the relevant provisions do not apply anymore. Accordingly, it is necessary to assess whether the provisions on non-countervailable subsidies in Regulation (EC) No 2026/97 should be maintained. In this respect, major trading partners of the Community no longer apply these provisions in their countervailing investigations. In view of this, and in order to maintain the balance of rights and obligations under the WTO Agreement on Subsidies and Countervailing  Measures, it is considered appropriate to repeal the provisions of Regulation (EC) No 2026/97 relating to non-countervailable subsidies.
The reasons stated by EC are equally applicable to India. The continuation of non-actionable subsidies in India’s statute books causes harm to the Indian domestic producers. They will not be able to get countervailing duties imposed to remedy the injurious effect of such subsidies. Further, the balance of rights and obligations undertaken by India under the ASCM also become skewed. There is a strong case for amending the law, especially Section 9(3) and the corresponding provision under the CVD Rules, to be in line with India’s WTO obligations under the ASCM.

[The author is an Associate, International Trade Practice, Lakshmikumaran & Sridharan, New Delhi]

End Notes:

  1. Final findings No. 17/6/2013-DGAD, dated 27th November 2015
  2. The World Trade Organization,  by Mitsupatsushita, Thomas J. Schoenbaum and Petros C. Mavroidis , Chapter- 12.
  3. Be Sodersten and Geoffrey Reed, In International Economic 299 ( 3rd Edition)
  4. Article 5 of ASCM
  5. Article 8
  6. www.wto.org
  7. WTO Trade Remedies, by RiidigerWolfrum, Peter Tobias Stoll and Michael Loebele, Volume-4, 2008.
  8. Overview and compilations of U.S.Trade statutes Part I and II , 2010 Edition, 111th Congress 2nd Session
  9. U.S. Code § 1677 (5B)-(G)
  10. By Regulation (EC) No 2026/97 of 6 October 1997, the Council adopted common rules for protection against subsidised imports from countries which are not members of the European Communities.

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